Article on safe withdrawal rates

[pb4uski]

One of the things shaping my retirement planning is what happened to my grandparents.

My grandfather retired with full pension at age 55. (Gram was a homemaker). It was a nice pension - more than enough for them to live comfortably. They moved from the Detroit suburbs and rented a nice apartment about 6 blocks from the beach here in San Diego. Life was good.

The pension was not cola'd. But they had SS as well from when he turned 62.

Then the 70's happened with all it's inflation. Since Gramps was already on SS, it made more financial sense for Grammy to head out to work.

So, in her 60's, she got a job as a "shop girl" at a gift shop in La Jolla. I'm not sure she had worked outside the home prior to that, ever.

I look at their plans - and how inflation destroyed the plans... and get nervous. It's enough to keep me in the "one more year" phase longer than I currently plan.

This is one of the reasons why I plan to wait until I am 70 to draw SS. From 62 onward SS is my plan B if for some reason I'm depleting my retirement nestegg too fast.

 

[haha]

1966-1982 was also a 16 year secular bear market characterized by huge swings in the major indices. Yes, there was higher than average inflation, especially in the later years of that period, but the stock market over that period did not see much if any increase.

So inflation is an enemy, but it's even worse when combined with no increase in stocks.

Despite the myth that inflation is good for stocks, the best situation for stocks is what we have had most of the time over recent decades, falling or low inflation. Inflation will always attack PEs, then eventually as the higher price levels work through sales and profits earnings will rise enough that even valued at a lower PE, equity prices may go up. See Ed Easterling's work.

Ha

 

[mathjak107]

actually if inflation gets to high its bad for stocks. anything like the 1970's is bad.

its only after inflation started coming down that stocks took off ..

 

[Tyro]

Whether it turns out to be worse than the Great Depression or the mid-60's is anyone's guess, a case can be made for any POV. I suspect most folks in the 1930's thought it was "an entirely different world/economy/measurement/planet" too.

Again, if history is of little or no value, what would you and marko propose as an alternative for planning purposes?

That's not exactly what I said (or meant), and I cannot speak for Marko. Since (as I believe) the rules have changed beginning in the '80s, (change occurs over time) and we're talking about an empirical science, I don't know if there's enough data yet to assess the 'new' economy, and that's at least part of my point. That and the fact that I have no idea what to use.

Currently, I'm using a 5% average annual return on investments, and 4% average annual inflation rate (cautious optimism) and hoping things will be at least that good over the next 40 yrs.

Picking a place to start, and remaining vigilant, flexible, and hoping for the best is about all we can do. YMMV.

Tyro

 

[Huston55]

Quote:
Originally Posted by rescueme
I was responding to mathjak107,
Sure, market history can certainly be used as an artifact to see how withdrawal rates would be affected in the "new retirement funding" of IRA/401(k);s of the current time, but if you're not in the market to accumulate or depend on it for retirement income, it makes little sense to consider it. Those who retired in the mid-60's (the point of time under discussion) were not necessarily concerned with safe withdrawl rates nor widely invested in the market.

This doesn't make much sense--so do we only begin analysis at the 80's or 90's to test? I agree that the future may not look like the past, but beginning with a particular portfolio level and testing it from the 30's or 50's makes a lot more sense than starting in the 80's. I may have misunderstood your point however.
And if your point is the future will not resemble the past, you are correct but the more pasts included in the model the more likely one will gain some useful information. Again, I suspect I'm misinterpreting your point.

If a dollar falls on Wall Street and your portfolio is not there to hear it, does it make a sound in anyone else's portfolio?

 

[HFWR]

Things are "different", for sure, but there are still 6 or 7 billion consumers coming on line, so maybe a few companies will make some money...

Since I'm not likely to be funding a 30-40 year retirement like some here, I'm pretty comfortable with a 4% SWR. Still deciding about when to take SS...

 

[JoeWras]

It's hard to remember just how bad it was, but it was bad. CD rates in the early 80's could push 20%. Yes, 20%.

I got my first job and car in 1985. Mom and Dad wanted to help me finance part of it with a loan/gift. Problem was Mom and Dad had a 5 yr CD that was paying something like 18%, due in just a few months, and this is where the money would come from.

The banker played some tricks and gave them a short term loan (at about 13%) to the end of the CD term, and the loan was backed by the CD. This was to save the penalty, which was huge when the CD was paying 18%. So, they at least made 5% during that 90 days or so.

 

[NW-Bound]

Despite the myth that inflation is good for stocks, the best situation for stocks is what we have had most of the time over recent decades, falling or low inflation...

actually if inflation gets to high its bad for stocks. anything like the 1970's is bad...

I have not seen anybody here saying that inflation is good for stocks. But other than piling into gold, equities are still a lot better than some fixed-incomes at 10-yr and 30-yr terms. Nobody wins, and we are just trying to minimize loss.

In the 79-82 time frame, I remember people even talked about buying collectibles like arts and rare stamps. Good grief!

Picking a place to start, and remaining vigilant, flexible, and hoping for the best is about all we can do. YMMV.

Amen.

 

[nun]

One of the things shaping my retirement planning is what happened to my grandparents.

My grandfather retired with full pension at age 55. (Gram was a homemaker). It was a nice pension - more than enough for them to live comfortably. They moved from the Detroit suburbs and rented a nice apartment about 6 blocks from the beach here in San Diego. Life was good.

The pension was not cola'd. But they had SS as well from when he turned 62.

Then the 70's happened with all it's inflation. Since Gramps was already on SS, it made more financial sense for Grammy to head out to work.

So, in her 60's, she got a job as a "shop girl" at a gift shop in La Jolla. I'm not sure she had worked outside the home prior to that, ever.

I look at their plans - and how inflation destroyed the plans... and get nervous. It's enough to keep me in the "one more year" phase longer than I currently plan.

I wanted to have a number of guaranteed retirement income sources that could track inflation as I don't want to rely on the stock and bond markets. So I have US SS and I paid the UK's equivalent of FICA voluntarily so that I will get a UK SS checks as well. I also have a rental property, although I'm a bit of a soft touch and haven't raised the rent for 6 years. Still those 3 sources should produce a cola'd $50k a year so that income from investments is gravy and can be reinvested.

Another factor that reduces risk is just reducing your retirement income needs. So while you are working I'd pay off the mortgage, buy a new car, do any repairs, just get as many major expenses out of the way while you have earned income. Without a mortgage or car payment $50k/year is a very comfortable income for a single person.

 

[Leon44]

I heard an interesting discussion on SWR on a radio financial talk show today. One of the host's was suggesting that we can no longer consider 4% a safe long term withdrawal rate. He did suggest that you may be able to still take 4% a year off your "new" balance at the end of the year after the effects of the market performance adjusted your portfolio one way or the other.

But he went on to say that his best option for at least a portion of your nest egg was annuities. He said let the insurance company take the market risk. Then instead of worrying about the long term safety of a 4% withdrawal you can receive more then 4% safely without shouldering the risk.

I know that annuities are not popular here and I don't own any. But when I think of them in the context of a safe a SWR it makes me reconsider them for at least a portion of my portfolio.

Anybody else use annuities to ease their SWR needs?

 

[nun]

I know that annuities are not popular here and I don't own any. But when I think of them in the context of a safe a SWR it makes me reconsider them for at least a portion of my portfolio.

Anybody else use annuities to ease their SWR needs?

SPIAs are not unpopular here as a mechanism to general a portion of your retirement income. Quite a few people have them and some have even used annuity type produces in the accumulation phase for the past 20 or 30 years.....ie those in the Federal Government or with access to products like TIAA-Traditional.

 

[braumeister]

Mark Twain made a very bad investment and had to file bankruptcy.

The poor guy made a number of bad investments; he never seemed to learn his lesson there.
How to Start Investing with Inspiration from Mark Twain

 

[Midpack]

I heard an interesting discussion on SWR on a radio financial talk show today. One of the host's was suggesting that we can no longer consider 4% a safe long term withdrawal rate. He did suggest that you may be able to still take 4% a year off your "new" balance at the end of the year after the effects of the market performance adjusted your portfolio one way or the other.

You can indeed take 4% off your new balance at the end of each year after the effects of market performance with absolute certainty you'll never run out of money. In fact you can take out 6% and also be certain you'll never run out of money following that methodology. Of course the funds available at the end of each year may rise comfortably (lucky), or they may rise and fall erratically (likely) or you could be eating cat food living under a bridge (unlucky), but you will NOT run out of money altogether. You might consider a new radio talk show...

 

[braumeister]

I heard an interesting discussion on SWR on a radio financial talk show today. One of the host's was suggesting that we can no longer consider 4% a safe long term withdrawal rate. He did suggest that you may be able to still take 4% a year off your "new" balance at the end of the year after the effects of the market performance adjusted your portfolio one way or the other.

But he went on to say that his best option for at least a portion of your nest egg was annuities. He said let the insurance company take the market risk. Then instead of worrying about the long term safety of a 4% withdrawal you can receive more then 4% safely without shouldering the risk.

I know that annuities are not popular here and I don't own any. But when I think of them in the context of a safe a SWR it makes me reconsider them for at least a portion of my portfolio.

Anybody else use annuities to ease their SWR needs?

That is exactly the point made recently by Wade Pfau, a well respected analyst.
Retirement Researcher Blog: An Efficient Frontier for Retirement Income

 

[Alan]

I know that annuities are not popular here and I don't own any. But when I think of them in the context of a safe a SWR it makes me reconsider them for at least a portion of my portfolio.

Anybody else use annuities to ease their SWR needs?

I would definitely consider annuities if I didn't have 4 pensions, SS for myself and DW, plus UK SS for myself.

It is nice to have those checks coming in every month covering all of our basic needs, while only counting on the retirement savings for the provision of lagniappe.

 

[NW-Bound]

The poor guy made a number of bad investments; he never seemed to learn his lesson there.
How to Start Investing with Inspiration from Mark Twain

Mark Twain was a predecessor to today's high-tech investors, some of them do get rich while many others fail. From the link that you posted,

He invested in a number of inventions, most notably the "Paige Compositor", an automatic-typesetting machine that would have been a fine device if it ever made it to market. However, the investor, James Paige, took 14 years to perfect it and other competitors beat his invention to market.

This failed investment contributed to Twain's bankruptcy in 1891, after sinking hundreds of thousands of dollars into the ongoing development of this machine, estimated to be at least $4 million in today's dollars.​

Hundreds of thousands of dollars in those days was a big sum of money! One could retire nicely on $4M of today's money. He was a venture capitalist, who obviously could have done better with stodgy dividend-paying stocks, or by diversification.

 

[nun]

That is exactly the point made recently by Wade Pfau, a well respected analyst.
Retirement Researcher Blog: An Efficient Frontier for Retirement Income

He advocates using SPIAs instead of bonds. IMHO a SWR for stocks and bond funds is 0%. Your retirement essential income should come from SPIAs, SS a pension or other stable income sources.

 

[youbet]

Another factor that reduces risk is just reducing your retirement income needs. So while you are working I'd pay off the mortgage, buy a new car, do any repairs, just get as many major expenses out of the way while you have earned income. Without a mortgage or car payment $50k/year is a very comfortable income for a single person.

While it's nice to have a new car, etc., purchasing these things shortly before retirement simply results in your retirement portfolio being smaller by that amount. For example, on retirement day #1 you have one million bux and your old car or you have $0.97 Million and a new car.

I did similar to what you described and took care of some house and car issues while still working thinking that would be less to worry about and finance while retired. After retiring, I realized I could have simply put the money aside and taken care of those things shortly after retiring when I'd have had more time to shop, do some of the work myself, etc. In hindsight, I'd just leave the money in the bank (so to speak) and spend it after retirement when I had time to do so most effectively. A new car or a kitchen remodel costs what it costs whether you do it in the year before retirement or the year after retirement. YMMV

 

[NW-Bound]

He advocates using SPIAs instead of bonds. IMHO a SWR for stocks and bond funds is 0%. Your retirement essential income should come from SPIAs, SS a pension or other stable income sources.

SWR for stocks and bond funds is 0% ? I guess if and when society is in a sufficient decline, that could be true. A lot of strange things has happened before in history.

However, when things get that bad, I do not see how SPIA, pensions, and SS would be worth anything. Just ask pensioners of the old Soviet block countries, China, and currently of Greece. These countries still exist, yet a lot of people are miserable, and it was not because they had a lot of stocks and bonds that became worthless.

 

[haha]

I have not seen anybody here saying that inflation is good for stocks. But other than piling into gold, equities are still a lot better than some fixed-incomes at 10-yr and 30-yr terms. Nobody wins, and we are just trying to minimize loss.

In the 79-82 time frame, I remember people even talked about buying collectibles like arts and rare stamps. Good grief!


Amen.

Actually, here and and elswhere, people don't have to say "inflation is good for stocks", but they say all the time- "you had better have more stocks to guard against inflation". I for one cannot see the operational difference etween these two phrases. And I believe that your choice of 10 to 20 year bonds, vs. stocks, is a rhetorical device proposed to prejudice the answer. Heard of cash? It's the 70s that are being talked about, and during the inflation of the 70s and early 80s, cash was by far the best performing asset. Of course, at that time our Federal Reserve Chairman was not insane, so it's possible that things could be different now. But unlike stocks or longer term bonds, cash has zero duration, which is a great comfort during accelerating inflation.

It is true that in a hyperinflation, like those experienced in Weimar Germany, Hungary just after WW2, and Zimbabwe immediately following their independence (as well as in many other "developing countries"), once that inflation was really roaring, the local stock market worked pretty well for people who could not get foreign hard currency, or farmland, or gold or other directly controlled valuable assets, and certainly better than local currency bonds or cash.

Nuance and detail are very important in economic decisions.

Ha

 

[NW-Bound]

Stocks might not do well in the 70s, but at least they kept even with inflation (I need to double check). Would that not be still better than bonds?

About cash, sure, I have 25% right now, and can raise it anytime with some mouse clicks, being a so-called "tactical asset allocator". I have no dogma in any matter.

 

[haha]

Stocks might not do well in the 70s, but at least they kept even with inflation (I need to double check). Would that not be still better than bonds?

Stocks did not keep up with inflation. They lost money compared to cash in the mattress, and compared to cash in the bank or cds. Bonds also did poorly. I was actively investing at this time, and buying any longer term bond would not have entered my consciousness until the amazing interest rates of Paul Volcker's reign. So I do not have data on bonds, but they sucked. Unlikely they sucked worse than stocks, but I cannot say. At any rate, why would anyone in possession of his faculties have bought either?

Ha

 

[Chuckanut]

I heard an interesting discussion on SWR on a radio financial talk show today. One of the host's was suggesting that we can no longer consider 4% a safe long term withdrawal rate. He did suggest that you may be able to still take 4% a year off your "new" balance at the end of the year after the effects of the market performance adjusted your portfolio one way or the other.

But he went on to say that his best option for at least a portion of your nest egg was annuities. He said let the insurance company take the market risk. Then instead of worrying about the long term safety of a 4% withdrawal you can receive more then 4% safely without shouldering the risk.
/QUOTE]

Dr. Wade Pfau has written an article that seems to indicate stocks and SPIA's would make a better combination for retirement that stocks and bonds, at least for some people. I am not an annuity fan, but it has made me think about investigating them in the future.

Here is the link: http://wpfau.blogspot.com/2012/09/an-efficient-frontier-for-retirement.html#.UJfxP4WmDfY

 

[NW-Bound]

Stocks did not keep up with inflation. They lost money compared to cash in the mattress, and compared to cash in the bank or cds. Bonds also did poorly... At any rate, why would anyone in possession of his faculties have bought either?

The 70 period was before my time, so I have no personal experience to tell. But I guess a lot of people might not be accumulating more stocks or bonds, and rather were just sitting on them, thinking it was already the bottom and would improve soon.

In the early 80s, even the credit union at my megacorp was paying 14% interest or more. I had my money in there, and never did think of taking it out until much later, when the market already moved up. Yes, one has to stay alert, which I failed to do, being so busy with starting a family.

 

[GrayHare]

The interest rate environment of the '70s is very different from that today. A century of data says that when 10-year Treasuries yield above 5% (most of 1970s), stock prices move the opposite direction of yield changes. When the 10 year yield is below 5% (today) stock prices move in the same direction as yield changes. Since the 10-year is currently below 5% and expected to rise, stocks will rise concomitantly. Once the 10-year reaches 5% and increases further, stocks will falter.